Is it okay to ask a chief executive officer about how his product impacts the environment? Is there ever a reason why you should deviate from asking about earnings, sales and execution?
This morning on Squawk on the Street we interviewed Jim Fitterling, the superb CEO of the new Dow Inc (DOW) , the spinoff of DowDuPont (DWDP) , which began trading today on the New York Stock Exchange. I made it clear last night on Mad Money and again, this morning, that I think Dow is and will be a terrific investment especially if you think that the world is going to go back to a growth path and that China and the United States are at the lead. I think the prospects are good for both innovation and for the cash flow, cash flow that will allow for a bountiful 5% plus dividend, the highest in the Dow Jones Industrial Average. Dow has been and always will be the best plastics company around and its taken the best parts of both Dow and DuPont to make it so.
But after Dow's bona fides were discussed I turned the discussion toward the future of plastics themselves. What happens if every state outlaws plastic bags, like the ban that New York put on plastic bags last week. What if Dow makes plastic that is recyclable, but recycling is uneconomic and people just end up throwing the bottles into the trash where it ends up in landfills? What can Dow do about the Great Pacific Garbage Patch? How can Dow justify, well, making this stuff at all if it is going to end up polluting the oceans?
These are not the kinds of questions I would have asked even a few years ago. They didn't seem relevant to the equation. They were extraneous, not on point because they have nothing to do with the earnings of the company.
But I no longer feel that way. First, to think that paper won't make a comeback and take share of plastic given the state of the environment, is almost fatuous and certainly represents an ostrich-like view of reality even as I prefer a plastic straw to paper. It really doesn't matter anymore. I am thinking of a BYOS policy, bring your own straw, at our restaurants.
That will directly impact earnings not too long from now. Do we really think that California, which leads in getting rid of plastic bags, won't soon go after soda companies, demanding aluminum or glass? That seems almost like a no brainer to me.
But perhaps more important than what earnings these kinds of companies will have is what future portfolio managers will pay for those earnings, or, in the parlance of Wall Street, what's the multiple going to be a few years from now.
When I speak to younger people I am so impressed about how much they care about the environment and how adamant they are about not using plastic. They will go to incredible lengths to not buy plastic water bottles, to buy glass or aluminum. They want so badly to stop the abuse of our waters. Some will go as far as to say that plastic is the new coal.
So, I think the price to earnings multiple will shrink over time, making it imperative to ask what would otherwise seem to be impertinent questions in an other era. I think you render yourself irrelevant if you don't.
I believe Dow will be a good investment. I believe Jim Fitterling and his company will do its best to not be a bad actor in the vast scheme of things. But if I don't ask these tough questions I now believe it amounts to a free pass, and as the late Mark Haines always told me, "Jim, No free passes."
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